12 SEPTEMBER, 2017

Businesses in India are predominately run by families and are passed on from generation to generation. In fact, even today 90% of the businesses in India are family-owned.

Family-owned businesses are quite unique. They are commercial organizations that are operated and managed by multiple generations of a family that are related by blood or marriage. These typically go through three main stages of business evolution – the founder stage, sibling partnership stage and the extended family association (Family Dynasty) stage.

Although, these three stages are very different from each other, they usually represent the evolution of a family business. And as the family business evolves, the succession plans must evolve, and the business must redevelop and customize itself to fit the new conditions and culture.

However, there has been a change witnessed in the way family-run businesses are managed, governed and transitioned. Organizations are now realizing the value of right governance, talent, and delegation.

Today, we look at some of the key challenges faced by family-owned businesses in India and how succession planning can help you address these issues.


What are the key challenges faced by family-owned businesses in India?

According to several statistics, most family businesses do not make it past the 3rd generation. Even after having many competitive advantages like a family name, trust between family members, and long-term business direction, these businesses still end up failing.

Below mentioned are some of the major issues that lead to the breakdown of family-owned businesses:

  • Conflicting point of views of the younger and older generations
  • Alignment of interests between current owners and others
  • Absence of well-defined succession plans
  • Access to capital to help grow and evolve the business
  • Difference of opinion between family member member with regards to the business
  • Difference of interest between two family members
  • Interests of the entire family not aligned with the interests of the business
  • Lack of communication and clarity amongst the family members
  • Disputes within the family
  • Managing diverse opinions of family members and external staff in making key decisions
  • Absence of family constitution on running the business and handling family wealth
  • Inability to chart out a growth plan for employees and family members
  • Unsound and unfair policies for the employees
  • Lack of professional management and professional participation
  • Lack of written understanding to address any conflict
  • Lack of quality control to match the modern techniques and advancements
  • Balancing of financial returns


How to build a successful succession plan to overcome the challenges?

The problems that businesses usually face are different at different stages and require a unique approach to solve it. A successful succession of the business can be of great help here. This is because a well-thought succession plan covers all potential challenges that a business can face. However, succession planning for family businesses is more complex than other businesses and must cover several aspects for effective growth.

Here's how one should go about it:


Step 1: Establishment of the goals and guiding principles

  • Identification of the vision, goals and objectives for the business
  • Identification of the rationality for achieving desired goals
  • Establishment of a roadmap to achieve the goals
  • Creation of a set of guiding principles in sync with the company’s vision and policies
  • Development of strategies for the direction of the business
  • Establishment of personal retirement goals and cash flow needs of retiring family owners
  • Identification of the goals for the future generation of management


Step 2: Establishment of an organizational structure

  • Setting up an organizational structure for smooth functioning
  • Deciding the level of involvement family members should have in leadership and ownership of the company
  • Equally division of power
  • Consideration of the option to bring in professional management


Step 3: Establishment of a decision-making process

  • Identification of the process of decision-making
  • Involvement of professional advisory in the decision-making process
  • Establishment of governance process for involving family members in decision-making
  • Establishment of a method for dispute resolution


Step 4: Establishment of a Succession Plan

  • Evaluation of the current succession plan
  • Building of liquidity and assets outside of the business so that the business can be successfully transitioned as the senior generation retires
  • Identification of successors (both managers and owners)
  • Identification of active and non-active roles for all family members
  • Identification of necessary additional support for the successor from family members
  • Documentation of the succession plan
  • Creation of an organizational structure and training strategies for the next generation of leaders
  • Communication of the succession plan to family/stakeholders


Step 5: Establishment of an estate plan

  • Assessment of the total estate
  • Fair division of the estate among the owners, business and future generations
  • Addressing of tax implications to the owner/business in different scenarios of estate division


Step 6: Creation of a Transition Plan

  • Creation of a succession strategy that will include the timing, future ownership and management shares as well as issues of capital
  • Establishment of a commercially optimal and tax-efficient solution to transfer the ownership of your business
  • Consideration of outright purchase, gift/bequest, or a combination of these for the transition
  • Establishment of a timeline for implementation of the succession plan

Get in touch with a relationship manager to know more about family business management and to avail advisory services for your business.


To conclude: 
Family businesses typically go through several stages of business evolution, and not all of them survive the transition. But if you have a well-planned succession, you can be sure of continued success for your family business.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.